Steelerfan

I think the regs consider gross ups to be deferred compensation, so yes, the delay rule would apply. Sorry I don't have a cite.

I agree that if the amounts had become payable due to a CIC in 2007, the transition rule could not be used to delay payment to 2008--the transition rule would seem not to apply to amounts that could be payable, but won't necessarily be paid. For example, an amount that is payable on separation from service in 2007 could not be delayed to 2008 if the employee separates in 2007.

It just seems to me that there is a big difference between a payment that is due and payable in 2007 with no additional condition attached (such as a planned installment) and a payment that is set to occur only if a CIC occurs. Isn't it theoretically possible when you have such a provision in your plan, that any time merger talks occur, the payments become potentially payable in that year? At what point is a CIC payment due and payable? Doesn't jhall's example kinda prove the point that the amount was not payable despite the possibility of payment because the deal fell through? Considering (assuming) that the IRS isn't going to be using 409A to seek out penalties, the transition rule will likely be applied liberally. Does anyone see any reason why an employer couldn't, before a CIC occurs, amend a plan post 2008 to completely remove a provision requiring accelerated payment on CIC (assuming the participants consent)? I don't think most employers would necessarily want to do this, but such payments can be onerous and raise unwanted 280G issues.

In fact, the rules are so liberal in this area that the preamble to the regs provides that you can add to your plans at any time provisions for distribution on death, disability and unforseeable emergency. pp. 19269. There is nothing to worry about with regard to "elections" in this arena.

I think that thinking of this as an elective deferral/distribution is incorrect. A plan that allows for distribution upon unforseeable emergency (UE) will generally provide that payment will be made upon the earlier of several events, one of which is UE. In that case, the payment event (unforseeable emergency) is set in advance and you have the choice to take it or not if an UE occurs. There is no need for an election at the time of deferral. The regs provide that you will not be in violation of the anti-acceleration rule or the subsequent election rules. In addition, the regs allow a plan to provide for cancellation of initial elections when you elect to receive a distribution on UE. Thus, it makes no matter what your initial election were anyway. Chaz: In your post, that statement from the regs is protective. It means that if you elect not to receive payment on an UE, such "election" is not a subsequent deferral or a "redeferral" that would be a violation. the final regs give as much flexibility as can be given for this circumstance.

How can you elect a time for distribution at the time of deferral for an unforseen event? Since they are by definition unexpected it would be pretty interesting to see how the IRS could require an election at the time of deferral. Plans can provide for these withdrawals as exceptions to the prohibition on acceleration if provided for in the plan.

BTW Insolvency is defined a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities, commonly referred to as 'balance-sheet' insolvency, or when the person or entity can no longer meet its debt obligations when they come due, commonly referred to as 'cash-flow' insolvency. The term insolvency is often incorrectly used as a synonym for bankruptcy, which is a distinct concept. Under the Uniform Commercial Code, a person is considered "insolvent" when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts as they become due Under that definition the company could be insolvent. The OP said "the employer does not have sufficient assets (or will not receive sufficient assets in the deal) to pay all benefits due under the plan".

Q1 You keep missing my point. It is commonplace for parties to negotiate the termination of a plan prior to a merger or acquisition because, for whatever reason, the buyer may not want to maintain the plan, or the seller, for whatever reason, may not want the buyer to maintain the plan. E.g., this was commonplace with 401(k)s until the IRS eased up on some of the rules. I never said the seller could avoid the liabilities after merger. IT HAS TO BE DONE BEFORE THE MERGER! Q2 Many investors have made millions and even billions purchasing "worthless" stock, only to see the company come back. Kirk Kerkorian anyone? Old car company's, etc. Read the Wall Street Journal. The best time to buy can be when the company looks deadest. Q3. See answer to Q1. Wouldn't a buy out be intended to save a potentially insolvent company? Enron was desperately seeking a buyer when the sh!t started to hit the fan.

The OP is saying the company can't pay, not that they won't pay. That suggests insolvency to me. In my experience, plans don't terminate on merger because all benefits have to be paid out--especially now with 409A's strict rules on termination it is rarely practical, and you definitely can't do it after merger. People who terminate at CIC can usually be paid out so termination is too drasic and unneccessary in the normal course. The employees who continue on in employment typically want the status quo to continue. I don't see why you say it is hard to merge NQ plans. Seems much harder to merge qualified plans with assets and 411(d)(6), etc. But at any rate, in the business I work in, the acuirors usually either merge or take on the prior plan as successor. As to the previous issue--some cases to chew on: Amending or terminating a top hat plan is different from amending a broad-based ERISA plan because top hat plans are not subject to the anti-cutback, non-forfeiture provisions, as are broad based plans. Courts have found top hat plans are analogous to unilateral contracts and have used contract law analysis when looking at decisions to amend or terminate plans Goldstein v. Johnson & Johnson, Carr v. First Nationwide Bank. Although claims for benefits are governed by ERISA, an employer's decision to terminate or cut back a benefit is analyzed under contract law. Thus, the real question here is probably whether or not the company can contractually terminate the plan. If the seller is essentially insolvent how can they "force" the buyer to bail the plan out? I can't imagine why they don't want to but, assuming the plan can be terminated, I don't see why the buyer couldn't make the deal contingent on termination of the plan. Again, I'm not sure what reasons would justify such a condition.

I'm not saying the seller can cancel anyone's rights, but the employees can agree to take what's available for the sake of the deal--they are all presumably shareholders. A buyer may not want to maintain a seller's plan and may not want to merge the plan, so they would want it terminated to get it off the books. This can happen in the qualified plans arena as well. As consideration, the buyer might pay a higher price. I disagree that plans are usually terminated. Most employees will have their account balances transferred to the buyer's plans because they don't want to recognize income. In the normal course, plans usually merge. In OP, there is obviously a funding problem; the money has to come from somewhere or participants have to take less. Every executive lives with the risk that the company may not be able to pay its liabilities under a NQDC, do you think that just because they are vested means that money will fall from a tree?

I'm saying that before the deal is done, depending on the leverage of the parties, the buyer could insist as a part of the deal that the seller terminate the plan. In exchange the seller could get a higher price for the stock.

I don't have citations, but I recall some court opinions that do not enforce ERISA claims procedures/remedies for top hat plans--I think it would depend on what circuit you are in and how the plan is drafted. I agree that the acquisition agreement should address this, but what if the buyer doesn't want to assume the liability and it isn't a merger of equals (which is rarely the case). Wouldn't that mean the participants have to agree to accept less and use it as leverage in negotiating a higher sale price? Otherwise, if the buyer wants the deal to go through shouldn't they agree to assume the liability?

Chances are the plan doesn't have a 409A compliant definition of CIC--right?, so you'd have to amend the plan in order for accelerated distributions to occur. Since a CIC has not occured yet, why can't you just amend the plan to remove the accelerated payment feature? A right to payment has not accrued because no CIC, so what does it matter that the payments would be paid if a CIC occured. As long as all the participants are on board (since this would be a reduction in benefits or rights), I'm not sure why you can't remove the feature. For the one's who do want their payments, provide for a 2008 payout under the transition rules just for them. Since constructive receipt could be an issue, don't wait to amend the plan--do it ASAP (preferably before the 4th Q)

I don't think 409A requires per se that employer meet the obligations of a plan, but only that there is no money left on the table that can be paid later. So the employees either have to agree to take less money or the acquiror should pick up the remaining liability. It might be kind of tough to rely on ERISA here since many courts don't apply ERISA's remedies in this situation--the participant's are thought to have only contract rights (depending on the jurisdiction you are in). If they don't want to sue, then the plan should be amended, each participant should agree to take what is available and they should sign a release and waiver. Otherwise, you'd think the buyer would be willing make the participants whole if they want the deal to go through.

Actually, I agree with you that the final regs did significantly curtail the STD exception, but no one seemed to talk much about it--more or less assuming that the change was not really a change, as the above poster suggests. But before the final regs, my understanding was that it was "clear" that a payment made within the STD period could have been considered "not deferred compensation" even if it could have been paid later. The final regs closed that loophole, as dicussed above. Now, in order to meet the STD exception, a bonus plan must vest and pay with regard to all payments. I don't think that was the conventional wisdom under the prop regs. The 2.5 months starts running on the later of the attachment of an LBR or the lapse of an SRF. You seemed to be confused about that when you said "the short-term deferral exception would apply even though the anniversary could occur after the 2 1/2 month period." In fact, the 2.5 period didn't begin to run until the anniversary, which is the lapse of SRF.

I thought the court made it clear that the QDRO only gave her benefits only through the date of divorce and not beyond. In which case there would have had to have been a forfeitre. Otherwise, I agree with you, it could be right. I think the P didn't argue this case properly.

Clearly the court awarded her only the benefit that accrued up to the date of the order. So what happened to the post divorce accruals? Since they can't go to the ex-W, they would have be forfeited. That doesn't seem fair or legal, but it is the logical result if W2 can't be a SS.

I don't see this as any different than having such terms built into the plan. It affects the paymet of the bonus and might as well be contained in the plan. I have seen bonus plans that have incorporated such provisions--payments upon termintion before the performance period is up. "Substitute payments" should be looked at very carefully since the IRS will look at substance over form.

BRAEHLER v. FORD MOTOR COMPANY UAW RETIREMENT PLAN Docket: No. 3:06CV-306-R. , 2007 WL 1805045 (W.D.Ky.) Current spouse got nothing even though H had her listed as SS after divorce of W1. This ruling confuses me because I can't see the rationale for not at least giving the new spouse amounts that accrued after the date of entry of the QDRO. But the court appears to have ruled that the former spouse is the only surviving spouse that can exist and gets all of the benfit. I don't get it. Did I miss something?

PA Changed the law in 2005 to conform with federal constructive receipt principles and 409A-otherwise there'd be no need to incorporate 409A. The timing of income taxation to the participant is not determinative of whether PA can tax the income as sourced in PA. Nonqualified deferred compensation is still taxable under the PA source rule if it is earned in PA even if you receive a distribution as a non resident (unless the plan complies with the federal law). The same is true for stock options and any other compensation that is earned in PA. No different really from the other 40 states that have source rules. 401(k)'s are still taxed at the time of deferral.

Make sure to see if the penalties also apply. PA incorporated 409A into its personal income tax code but not with respect to the 20% penalty and interest.

A severance plan that only pays on RIF, that stinks! I guess some industries have different standards Do you have any final opinion on the 409A limit applying to VEBA severance?

That's true, but severance packages predominently have an element of service and compensation built into the formula (as does the plan where I work). The vesting schedule is a little strange, but only relevant to the "guaranteed" portion of the analysis. there is no legal reason why a severance plan as welfare benefit couldn't have a vesting requirement. The only necessarily "offensive" term is that the plan would have paid out on voluntary termination--that bodes bad for severance as welfare benefit. But the significance of this case to me is that the court wouldn't have anything to do with ERISA's definition of severance and didn't care if it met the definition of "welfare benefit plan". And also that it seemed to suggest in the footnote that a VEBA would have been ok. Post 409A, my concern for a VEBA is not just whether meeting ERISA's definition is enough--but also whether I have to be congnizant of the 409A limit on severance?

I would apply subsequent deferral analysis to this situation. The regs treat the deferral of an amount, for which performance of services has begun, that is about to vest as subject to the rules for subsequent modification. So the deferral looks like an initial deferal but is actually a subsequent election because the performance of services has begun. The election would have to be made within 12 months of payment, which doesn't look possible here and satisfy the 5 year rule I would use as an analogy the vesting of restricted stock. An election to receive actual payment of the stock on a date after the vesting date, such as termination of employment, must be made either at the time of grant or 12 months before the stock vests. In your case since the election to defer was not made when the legally binding right to the compensation attached, it would have had to have been made 12 months before the right vested, which is impossible. So I'd say he has to take the scheduled payment unless the exception you mentioned applies. It's hard to say if this meets the requirement of materially greater, but it doesn't look like there is a valid SRF. Given the penalties it's hard to take the chance. Also if this is a public company, you could jeopordize the deductibility of the payment under 162(m) if you made that sort of adjustment.

It would pass testing.